Bonds in a portfolio

[diyinvestor]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

[DoctorM]

This is a great question. By in large, quality bond funds are safe, even if there is some volatility. However, as interest rates are close to zero, many funds do not pay a significant amount of interest, and thus keeping your money in a money market fund is a perfectly good plan without volatility. A new trend is to buy high yield bond funds. These pay more interest. In the past, these were considered more risky, however with the new fed backstop, the risk reward ratio is making sense for many more investors than before. I use to love US Treasuries, however now, after the market has stabilized, I have moved most of my cash into a money market account. I am pondering buying a portion in high yield bonds, just want to do some more research first. Other Boggleheads...Love to hear your thoughts!

[Hector]

I don’t like to loose see my bond fund going down as well and I prefer individual treasurys in accounts I can. By holding treasurys, I don’t loose in nominal terms at least. Plus treasurys go up when stock goes down.

[Now Boarding]

I have a Buffett-like portfolio: 90% in VOO (S&P 500) and 10% in the Vanguard Treasury Money Market. I’m happy with my choice, especially given how poor bond returns appear to be over the next several years. I’d rather take my risk on the equity side.

[retired@50]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

See link for a comparison between Total Bond Market and Cash. https://www.portfoliovisualizer.com/bac ... ion2_2=100

Cash doesn't do all that well with regard to keeping up with inflation, so holding cash can decrease your buying power over long periods of time.

Regards,

[mega317]

It’s not an outrageous idea.

To respond directly to one part of your post, cash is not risk free either.

[Dude2]

Typically, the yield curve illustrates why this is not wise. Returns are higher the longer the duration. Therefore, keep assets you don't need for a long time in vehicles with a longer duration. Intermediate term is considered the sweet spot. That's the Boglehead plan. Stick to it.

All that being said, we live in interesting times. If you can get approximately the same yield going short as you can going long, logic says go short.

The beauty of TBM is that it (to some degree) reflects the entire bond market. It contains short, intermediate, and long. If the entire market decides to favor short, TBM should reflect that. You don't have to do anything. Stay the course. Don't get caught market timing. Be agnostic and buy whole markets.

[climber2020]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

Because bonds can increase in value as well and keep up with inflation.

Scroll down a little and look at the chart: https://investor.vanguard.com/mutual-fu ... ance/vbtlx. Cash would be a horizontal straight line.

[L82GAME]

I don’t like to loose see my bond fund going down as well and I prefer individual treasurys in accounts I can. By holding treasurys, I don’t loose in nominal terms at least. Plus treasurys go up when stock goes down.

Hi Hector,

Treasuries are not negatively correlated to equities. Rather they have very low to virtually no correlation, depending on their term. Setting aside the effect of duration, the longer the maturity of a Treasury, the greater its sensitivity to price increases, and therefore the greater its price volatility.

[Third Son]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

I am making money off of my bonds. Where is the problem?

[galeno]

From 1984-2005 we held 80-100% equities. We didn't bother with bonds. With high a high stock allocation bonds are not necessary.

When we went to 60/40 in Jan 2006 we bought our first bonds.

[dbr]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

You can. Keep in mind cash can also decrease in value. Right now cash stored at no interest is losing between 1% and 2% a year in purchasing power every year and can lose a lot more. Also the value of the holding after earnings is variable for cash as well because interest rates change constantly.

The idea that cash and the various ranges of bonds are somehow fundamentally different is wrong from the point of view of investing, specifically the idea of "stabilizing" a portfolio. Without saying exactly what you mean by "safe" that word does not mean anything. It might actually take more work to hold cash safely than to hold bonds safely, meaning that the money might somehow be stolen or become inaccessible under reasonable circumstances.

[Hector]

I don’t like to loose see my bond fund going down as well and I prefer individual treasurys in accounts I can. By holding treasurys, I don’t loose in nominal terms at least. Plus treasurys go up when stock goes down.

Hi Hector,

Treasuries are not negatively correlated to equities. Rather they have very low to virtually no correlation, depending on their term. Setting aside the effect of duration, the longer the maturity of a Treasury, the greater its sensitivity to price increases, and therefore the greater its price volatility.

From what I have experienced, treasurys go up when stock goes down.
About price volatility, if I buy at 0.4% 5 year note today, I will sell it when 1 year maturity is remaining and if 1 year is yielding less than 0.4%. If not, I will hold till maturity.
I will also sell it if stock goes down, where it is very likely that all the 5 year notes that I have been buying regularly, few of them would have gone up in value or have not gown down in value. I will sell those. So price volatility in negative direction is not something that I would experience in most cases. Granted market value of my notes will volatile on regular basis. But my concern is when I am going to sell them.

[Call_Me_Op]

Since bond funds can decrease in value, and are not risk free, why not use cash as the safe and stabilizing part of a portfolio?

If you buy the right bonds, any decrease in value is small and always temporary - and expected returns are higher than cash over a time period of a few years. In addition, high-quality bonds tend to be negatively correlated to stocks in time of stock market stress - an added bonus.